How young investors can save tax without denting their pockets

Updated: 23 Jan 2019, 01:06 PM IST

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Tax-saving for young earners simplified

If you are a young earner who wants to save on tax without locking away your money in a long-term investment and don't want to put a dent in your wallet, here are a few tax-saving investments and tax breaks you can use.

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1. House Rent Allowance

To avail the HRA tax exemption, you need to submit rent receipts or the rent agreement. Quoting the landlord's PAN is mandatory if the rent paid is more than Rs 1,00,000 annually, i.e., Rs 8,333 a month, to avail the full benefit of HRA exemption.How to claim: In the absence of a rent agreement, a duly signed declaration from the landlord can help.

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2. Education loan

If you had taken an education loan for your higher studies, and are working now, don't forget to claim this deduction. Section 80E of the Income-tax Act, 1961 allows for deduction on the interest paid on the loan. You can deduct the entire interest amount paid from your taxable income and the deduction is allowed for 8 years. The principal amount does not qualify for any tax deduction. But keep in mind that only an individual paying interest on the loan for himself/herself or spouse can claim this deduction.How to claim: To claim this deduction, you need to get the certificate of interest paid from the lending institution and submit it as documentary proof to your employer.

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3. Health insurance

The premium paid towards health insurance qualifies for tax deduction under Section 80D. The benefit is available to individuals on health insurance premiums paid for self, spouse, children, and parents. Now, if you are already covered by a corporate group insurance policy, you may feel that you do not need additional health insurance. In that case you should consider buying it for your dependent parents.

You can claim a maximum deduction of Rs 25,000 on the premiums paid. If the premiums paid by you is towards the health policy of your parent, who is a senior citizen of aged 60 years or more, the maximum amount is capped at Rs 30,000. Hence, you can maximise your tax benefit under section 80D to a total of Rs 55,000.How to claim: When you buy a health insurance policy, normally the insurer will issue you a certificate for the premiums paid which you should keep as proof to claim the tax break. If you do not get the certificate, then ask the insurer for it. Else, the insurance policy or any receipt issued showing that you have paid the premium by cheque is sufficient. You will need to submit a photocopy of this document to your office to ensure that they take it into account while calculating the tax that is to be deducted from your salary.

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4. Tax breaks under section 80C

Investment up to Rs 1.5 lakh in avenues specified under Section 80C of the Income Tax Act is deductible from your gross total income and thereby reduces your tax payable. If you contribute to EPF from your salary, the contribution would automatically become eligible for deduction from your gross total income (mainly your salary) before tax payable on it is calculated. Further, there are various expenditures which qualify for deduction from gross total income under section 80C.

Of the 80C investments, young earners can consider equity-linked savings schemes (ELSS). ELSSs come with a mandatory lock-in period of three years, which is one of the shortest among popular tax-saving instruments. PPF is another popular tax-saving instrument but it has a lock-in period of 15 years.

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What if investments declared at start of FY and actual investments differ?

If your actual tax-saving investments are lesser than what was declared in the beginning of the FY, your employer will compute your tax liability again. Your tax payout will be higher in the last few months of the fiscal as your employer is likely to increase the TDS from your salary during this time to adjust for the lower tax deducted earlier.

If actual investments made in the FY are more than what you had declared in the beginning of the year, you have been paying a higher tax. You could request your employer to deduct a proportionately lower tax in the last few months of the fiscal to compensate. Else, you can claim a tax refund while filing your tax return.